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House Tax Panel Moves To Fix Corporate Capital Gains "Tax Trap"

Friday, June 13, 1997

Deloitte & Touche OnLine

An amendment to fix the so-called "capital gains tax trap" for corporations with losses was approved June 12 by the House Ways and Means Committee.

The amendment, offered by Rep. Philip English, R-Pa., would permit corporations to deduct their ordinary losses from any qualifying capital gains before determining their capital gains tax liability. It would cost about $1 billion.

As proposed by Rep. Bill Archer, R-Texas the committee’s chairman, the provision "would provide no relief in many situations where a corporation has both a net capital gain and an ordinary loss from operations," according to a description of the amendment. "A corporation so situated will not benefit from the preferential corporate capital gain tax rate because the corporation is not allowed to offset its ordinary loss against capital income," English said, which would result in the Archer plan creating "higher tax than would be produced using the regular corporate tax calculation."

To offset the cost of the change, the English amendment would increase the holding period for corporate capital assets from five years to however long is necessary to raise the amount of revenue required to offset the amendment’s cost.

During action on the tax bill Thursday, the committee also agreed by voice vote to an amendment by Rep. Xavier Becerra, D-Calif., to modify Internal Revenue Code section 108(f) so that an individual can exclude from gross income any forgiveness of loans made by universities or private foundations if the proceeds of such loans are used to pay for attendance at an educational institution or to refinance outstanding student loans and the student is not employed by the lender organization. As under current law, the student would be required to work for a specified period of time in a certain profession.

The committee also agreed, 22-13, to a proposal by Rep. Benjamin Cardin, D-Md., to provide a $150 tax credit to pay for tutoring programs for special-needs children from kindergarten through 12th grade. The new tax credit would be paid for by setting a $5,000 per year limit on the amounts that can be contributed to pre-paid college tuition programs. Archer’s original proposal would have limited such contributions to $50,000 total, but did not have any annual contribution limits.

Morris Trust Amendment Expected: Rep. Richard Neal, D-Mass., is expected to offer an amendment later in the session that would change the Section 355 provisions in the bill to permit intragroup spin-offs to continue but to give the Treasury secretary the authority to issue regulations to prevent any abuses. The proposed legislation would block any intragroup spin-offs under Section 355 but give the secretary authority later to reinstate them if it is determined abuses can be prevented.

The committee is expected to continue to meet through the night until it completes work on the tax legislation.